Long-duration bonds and sovereign defaults

Juan Carlos Hatchondo and Leonardo Martinez

No 08-02, Working Paper from Federal Reserve Bank of Richmond

Abstract: This paper extends the baseline framework used in recent quantitative studies of sovereign default by assuming that governments can borrow using long-duration bonds. Previous studies have assumed that governments can borrow using bonds that mature after one quarter. Once we assume that the government issues bonds with a duration that is close to the average duration observed in emerging economies, the model is able to generate a substantially higher and more volatile interest rate. This narrows the gap between the predictions of the model and the data, which indicates that the introduction of long-duration bonds may be a useful tool for future research about emerging economies. Our analysis is also relevant for the study of other credit markets.

Keywords: Bonds (search for similar items in EconPapers)
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Date: 2009
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